WOULD the benefits of Scotland adopting a lower rate of corporation tax outweigh the costs?
Exchequer Secretary David Gauke weighed into the debate yesterday in a pithy letter to the Scottish Government Finance Secretary John Swinney. Devolution of the tax was rejected by CBI Scotland last week on the basis that the costs and risks of such a move would outweigh any potential benefits, though a number of prominent Scottish business leaders support the idea. On Monday, the critics were joined by the Scottish Trades Union Congress, which accused the SNP of “hocus-pocus economics” and claimed the tax could undermine economic stability and leave essential services starved of funds.
The Scottish Government’s consultation paper about the idea accentuates the positive. Cutting corporation tax could kick-start growth and help Scotland counter the unhealthy concentration of UK business activity in the south-east of England. And, though the initial drop in tax receipts would have to be covered by borrowing, if the stratagem pays off, an expanding economy would generate enough extra tax revenue to fill the hole. As Mr Gauke points out, this is a big if.
The SNP’s case draws heavily on some truly heroic assumptions about the jobs and growth that could be created by cutting corporation tax in Northern Ireland to 12.5%. In Scotland, where the economy is more integrated with the rest of the UK, a differential tax rate would be more costly and more complex to administer. Far from simplifying corporation tax, as the SNP claims it would, a business tax in which both the rate and the base could be varied (as they propose), looks pretty complicated. CBI Scotland agrees.
However, as the minister responsible for the UK tax system, Mr Gauke’s main concern is about the costs, not just to the UK but also to Scotland itself. Not only would the short-term effect of a bargain basement tax rate mean a smaller tax take, but it would also encourage many of Scotland’s smaller companies to opt for incorporation, so reducing the revenue from income tax and National Insurance too. And the cost of policing the system to ensure that UK companies were not trying to shift profits from business south of the Border on to their Scottish balance sheets to avoid tax, would be considerable. What about the taxation of foreign profits?
The inevitable complexity of such a system would also impose extra bureaucracy on companies, which is part of the rationale for CBI Scotland rejecting the idea.
Given that Northern Ireland is also pushing for the devolution of corporation tax, Mr Gauke misses the main objection to extending the same power to Scotland. Wales would be sure to follow, so the biggest risk is a race to the bottom in which no part of the UK would enjoy competitive advantage – merely a large hole in their balance sheets.
Unless these issues can be resolved, it would be risky to tag new tax-raising powers on to the Scotland Bill currently going through Westminster.
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